Falling profits across the small business sector have resulted in companies struggling to pay their bills and many to keep trading while insolvent, according to a major debt collection agency.

A briefing paper released by Prushka Fast Debt Recovery, which acts for more than 45,000 clients in Australia - the bulk of which are small businesses - shows Prushka’s debt collection levels have fallen 15 per cent year-on-year, despite increased client numbers.

Prushka has noted a 40 per cent year-on-year rise in statutory demands — the first step in the process of declaring a debtor insolvent — in order to force some payment of an outstanding debt.

Such is the financial stress on clients, the majority are unwilling to follow through with liquidation procedures after issuing a statutory demand, due to the costs involved.

‘‘The reason they’re reluctant to do that is it costs between $4000 and $5000 and they’re feeling is the creditor is insolvent anyhow,’’ said said Prushka chief executive Roger Mendelson.

‘‘We’re definitely finding that there’s a lot of insolvent companies that should be dead and wound up, but they’re still trading.’’

Prushka warns the data is the ‘‘canary in the coal mine’’ for the economy, as it demonstrates that cautious businesses and households are keeping their hands in their pockets for longer than usual before paying debts.

‘‘Where the real issue is is business-to-business, where businesses are putting a lot more pressure on supplier to cut margins to come up with good prices,’’ Mr Mendelson said.

‘‘The turnover is also down but more importantly the profit margin is down so the jobs are getting a lot skinnier from the suppliers’ point of view.’’

According to Mr Mendelson, in particular danger were ventures that have a low number of invoices of high value, such as construction companies.

‘‘They only need one or two customers to fall over and that can have an impact right down the line,’’ Mr Mendelson said.

The briefing paper also found that there had been an increase in clients asking for recovered funds to be released earlier, and that many businesses were disputing debts purely as a deferral tactic.

It also found that businesses across the board were moving away from growth plans to focus on just surviving.

Mr Mendelson predicted the following 12 months would be ‘‘very flat’’.

‘‘I think businesses are getting better - they’re getting leaner and meaner. But there comes a time when consumers get out and start spending again.’’